With their long and successful history stretching over the past 150 years, investment trusts have stood the test of time and have long been popular with seasoned investors. NMTBP explores how investment trusts could help you meet your financial objectives

Investment trusts are a type of collective investment scheme that pools investors’ money to invest in a diversified portfolio of assets. Unlike unit trusts and open-ended investment companies (OEICs), investment trusts are closed-ended. They issue a fixed number of shares, which can then be bought and sold on the London Stock Exchange

Investment trusts are public companies that seek to make money for their shareholders by buying and selling shares in other companies or assets. They are run by professional fund managers who manage investment trusts and access the latest ideas and opinions from investment teams. And to ensure that the managers always act in the best interests of investors, they’re overseen by an independent board of directors

By investing in an investment trust, you become a shareholder in the company. As a result, you have the right to vote on a range of issues including any changes to the investment policy and the re-election of directors

How do they work?

The value of the assets held by an investment trust is known as the net asset value (NAV). Shares in an investment trust may trade for less than the NAV (at a discount) or for more than the NAV (at a premium)

The level of premium or discount changes on the basis of changing market sentiment towards a sector and individual investment trust. If an investment trust is trading at a discount to its NAV and the discount reduces or moves to a premium, investors will make an additional return over and above any return from the trust’s underlying assets. However, if the premium on an investment trust reduces or a discount widens, this will detract from returns

Investment trusts can borrow more money to invest, which is also known as gearing. This approach can magnify gains for shareholders in a rising market but also lead to more significant losses when markets fall

10 reason to choose investment trusts

1) Investors are shareholders

Once you’re invested, you become a shareholder in the company. This means you have a say in how the company is run, from its investment policy to the re-election of directors

2) Small minimum investments

You can own a stake in large companies and properties for a relatively small amount of money. As investment trusts are collective investment funds, they pool cash from many investors to buy a diverse portfolio of assets

3) Purchasing power

An investment trust pays a fraction of the dealing costs that a private investor would pay because it has the purchasing power to negotiate lower fees

4) Risk management

Investment trusts enable you to spread your money between different companies, geographical regions, and industries. This diversification can help to protect the value of your investment when market conditions are more volatile

5) Easy to track

Investment trusts are transparent. You can see where your money is invested through regular updates from fund managers and track performance daily on the stock market

6) Investor protection

Despite their name, investment trusts aren’t trusts – they are limited liability companies with ordinary shares listed on the London Stock Exchange. They are required to produce regular financial reports and must act according to strict regulations

7) Invest in the best

Investment trusts are closed-ended, which means that they do not need to sell assets to pay investors who wish to exit the fund. This structure means the fund managers can maintain a long-term investment strategy with the minimum of disruption

8) Easy to buy and sell

Investment trusts trade on the stock exchange, so they are liquid like other publicly traded shares. As a result, investors can buy and sell their shares whenever they want

9) Gearing advantage

Unlike collective investments, such as unit trusts, investment trusts can borrow money. This means the fund manager has easier access to capital to invest in high-conviction investment ideas

10) Smoothing dividends

In contrast to open-ended funds, investment trusts can keep up to 15% of their dividend income in reserve each year rather than paying it all out immediately. They can then use this reserve to supplement income payments in future years

Challenges and Considerations

While investment trusts offer a plethora of benefits, they are not without risks. As with any investment, there is the potential for capital loss, and investors should carefully assess their risk tolerance and investment objectives before investing in any trust

Moreover, the closed-ended nature of investment trusts means that their shares can trade at a premium or discount to their net asset value (NAV). This premium or discount can widen due to various factors, including market sentiment, investor demand, and the trust’s performance relative to its benchmark. Investors should be mindful of these fluctuations, as they can impact returns

Additionally, gearing, while potentially enhancing returns, also amplifies risk. Investors should be aware that gearing can magnify losses in a falling market, potentially eroding capital

Conclusion

Investment trusts occupy a unique position in the investment landscape, offering investors a compelling combination of diversification, professional management, access to niche markets, tax efficiency, and the potential for attractive long-term returns

While they may not be suitable for every investor and come with their own set of risks, investment trusts remain a valuable tool for those seeking to build wealth, generate income, or achieve specific investment objectives. With careful research, due diligence, and a long-term perspective, investment trusts can play a valuable role in a well-diversified investment portfolio